Wednesday, October 15, 2008

We may be witnessing the slow death of the U.S. Postal Service's Sectional Center Facilities (SCFs). Exhibit A: Periodicals rates.

In early 2007, dropshipping magazines to an SCF rather than an ADC (Area Distribution Center) typically saved publishers several cents per pound. After Periodicals rates were overhauled last year, that changed to about a cent and a half. Meanwhile, rising freight costs have cut further into incentives to ship to SCFs.

(Some background for those who aren't postal geeks: Dropship programs for magazines, catalogs, and other mailed products have traditionally focused on the approximately 350 SCFs spread throughout the country. But in recent years, Periodicals mailers have also been able to obtain some dropship discounts by delivering to the approximately 100 ADCs, the vast majority of which do double duty as large SCFs.)

A logistics executive said it costs at least $75 to stop at a postal facility that is on a truck's route -- and of course more if the stop adds miles to the truck's run. That rules out all but a handful of non-ADC SCFs for even large mail pools.

Here's an example: Suppose a shipper has Periodicals SCF pallets averaging 1,000 pounds each and 40% advertising content and is wondering whether the postal savings from delivering them to the SCF would justify the cost. For each pallet going to an SCF instead of the ADC, there would be savings of $4 on advertising weight, $4.80 on editorial weight, and $5.66 for the pallet -- a total of $14.46. Even in the best case, the shipper would need more than 5,000 pounds just to break even on an SCF delivery.

For a mail pool of 1 million pounds (3 million copies averaging one-third of a pound or 2 million averaging half a pound), 5,000 pounds would represent 0.5% of the total mailing. An exclusive Dead Tree Edition analysis indicates that only six SCFs (Houston, Austin, West Palm Beach, Tampa, Raleigh, and Norfolk, VA) meet the 0.5% standard in a typical pool that is spread relatively evenly throughout the country. And some of those, such as Norfolk, are so far off the beaten path that serving them would cost far more than $75.

One solution is to ship Periodicals with Standard mail (catalogs and direct mail), which has a greater incentive per pound to deliver to SCFs. But that doesn't work for the small printers that produce only magazines and are trying to build economical mail pools for their customers. And truckers report that it's increasingly difficult to get unloaded quickly when dropping a mix of Periodicals and Standard as opposed to a pure Periodicals drop.

There are reports that Periodicals mailers have gradually backed off shipping to SCFs and instead are dropping larger loads at ADCs. That isn't necessarily bad for the Postal Service, which is burdened by having too many small SCFs (and a few ridiculously small ADCs, such as the two serving West Virginia). In fact, the Postal Service is taking other actions that are making some SCFs obsolete -- but more on that in a later post.

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